International Tax Planning

Fidesco Trust Corporation - Established 1997

One Possible Starting Point – The Trust with a Holding Company

The Trust with a Holding Company

International tax planning is concerned with finding ways to legally reduce tax burdens (called “tax avoidance”). In the above example, beneficiaries who are resident and domiciled in a tax haven for individuals will not pay taxes on distributions received out of the Trust Fund unless they are subject to taxes elsewhere by reason of their nationality or otherwise. All other beneficiaries must declare each distribution received out of the Trust Fund to their respective tax authorities. If they should fail to do so, they could be charged with deliberately undertaking actions to free themselves in an illegal manner from tax burdens to which they would otherwise have been subject to (called “tax evasion”).

International Tax Planning for Conduit Operations

 

For the purpose of our example in respect of conduit operations we have assumed that the Holding Company is the parent company of Company A and that Company A is the parent company of Company B. Company A and Company B are referred to as conduit companies in international tax planning. In addition to holding a minimum number of shares in the capital of its conduit company, a parent company may also have to maintain an active investment in that company. An active investment is usually deemed to exist in the case where the parent company provides certain services (e.g. accounting and financial analysis) to, or performs given functions (e.g. research and development) for, its conduit company. Careful planning is required in order to avoid creating a permanent establishment for the parent company in the country were its conduit company is resident for tax purpose. An important feature of international tax law is the principle of taxation on the basis of a permanent establishment. Under this principle, business income derived in a country by an enterprise which is not a resident of that country will be taxed there if the business it carries on is of a continuing and lasting kind. One possible way of avoiding a permanent establishment is to carry on business with and not within a foreign country.

International Tax Planning for Transfer Pricing Operations

 

 

The term “re-invoicing” is sometimes used to describe transfer pricing. The difference between the two terms is that the companies involved in re-invoicing operations are not necessarily members of the same group of companies. For the purpose of our two examples in respect of transfer pricing operations we have again assumed that the Holding Company is the parent company of Company A and that Company A is the parent company of Company B. We have also assumed that Company A is a manufacturing company and that Company B is a marketing company. In Example A, raw materials are acquired by Company A and its finished goods are sold to the Holding Company for resale to Company B. The finished goods are delivered directly to Company B with only the title to the finished goods being delivered to the Holding Company. In Example B, raw materials are acquired by the Holding Company and then resold to Company A. The finished goods of Company A are then sold to Company B. Many countries have enacted anti-avoidance legislation aimed specifically against transfer pricing operations. The sale of finished goods at arm’s length prices to unrelated marketing companies located in such countries could be one of the alternatives used to protect the tax savings achieved by group companies which are able to make use of less restrictive countries in their transfer pricing operations.

Closing Remarks

International tax planning requires an in-depth knowledge of tax treaty provisions. In addition, continual monitoring of developments in international tax laws is essential to keep the original tax plan in step with changes. We therefore strongly recommend that international tax planning should be entrusted to a professional adviser located in the jurisdiction where the Client is resident and domiciled for tax purposes. By professional adviser we mean a reputable lawyer specialised in international tax planning or one of the leading international firms of chartered or public accountants.